9911796707
TMI Blog2006 (5) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is running a software development centre. During the year under consideration, he incurred an expenditure of Rs. 15,85,691 under various heads and claimed deduction for the same on the ground that these expenses were incurred by the assessee in developing software and so the same were revenue in nature and has been charged by the assessee in the P L Account. However, the Assessing Officer by passing a detailed order mainly disallowed this impugned expenditure to the assessee on the reasoning that the assessee-company had no activity of business during the year as no bills were raised for software development activities and even no correspondence or any documents were filed by the assessee which could substantiate its claim that it had started this software development activities. 3. Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the CIT(A) and submitted that the assessee-company was incorporated in the month of June 1997. The assessee further explained the main objects of the company before the CIT(A) as per its Memorandum articles of Association of the Company as have been narrated by the CIT(A) in his order. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Pvt. Ltd. (Haryana) that based on your proposal, we herewith authorize you to start with the development activities of the redesign of the dia Guard Client/Server System, which is built on certain component and in this very letter they have also mentioned that we expect the first operation prototype in the month of June 1999 and as per your proposal the cost for the above items is SFR 4,00,000. 6. Thereafter, the CIT(A) observed that from the communication made through letter dated 18-6-1997 and 15-12-1998, it was seen that similar type of activities were required to be performed by the assessee as per these letters and whereas second letter dated 15-12-1998 states that Adasoft AG expected the first operational prototype in the month of June 1999 which indicated that the business of the assessee was not commenced till 31-3-1998 which is relevant to assessment year 1998-99 under consideration. He further observed that nothing has been brought on record to show that the assessee had made any compliance with reference to letter-dated 15-12-1997. 7. Further, regarding the issue of commencement of business in the year, under consideration, the CIT(A) observed that the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id to them etc. The assessee further contended before us that from the weekly ADAC Reports placing at Paper Book Pages 52 to 65 for the week ending 8-8-1997, from the report submitted on 8-8-1997 by Engineer Pankaj Sethi, it is clear that during the week ending 8-8-1997, the engineer actually carried out the activity of the study of existing client system, Design of Menu Navigation in ADAC, Connection to ODBC Data Source (SQL Server), TCP/IP connection to ADAC Server and design of entry administration screen in ADAC for employee and visitor and similar is the weekly report of another Engineer A.K. Udayasuryan indicating the activities of R D on existing 16 bit ADAC version 1.0 understanding class CacusApp in ACUS.CPP, understanding class Ctran Enable Database in ADGENUTL.H and understanding Window NT Process Thread management and similar is the report of Engineer Parvesh Sharma regarding the activities carried out in the week ending on 8-8-1997. 11. The learned AR for the assessee further drew our attention to documents viz., dia Guard Database Requirement document dated 3-3-1998, dia Guard System - Proposal for Action Profile Script Language dated 28-1-1998 and submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a property for being let out can be said to be only a preparatory stage (analogous to the acquisition of buildings, plant and machinery in a manufacturing business), the subsequent activities certainly constitute activities in the course of the carrying on of the business. It would not be correct to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises of started paying rent." (3) In the case of CIT v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.), Their Lordships observed that " Business connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities is started." (4) In the case of CIT v. Kanoria General Dealers (P.) Ltd. [1986] 159 ITR 524 (Cal.) Their Lordships held as under "Where a business unit has been set up by the assessee which is ready to commence production, the assessee will be entitled to claim deduction of expenditure and the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions." (3) In the case of Orient Cosmetics Ltd. v. Dy. CIT [2000] 74 ITD 135 (Mad.), the Tribunal held that "Unless and until the assessee-company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it has started manufacture of production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in the preparation or manufacture of the final products." (4) In the case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Guj.) Their Lordships held as under "There is a clear distinction between commencing a business and setting it up. For the purpose of section 3(1)( d ) what is required to be considered is the setting up of a business. When a business is established and is ready to start business it can be said to be set up. The bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee we find that only the principles laid down in the cases ( supra ) are required to be applied to the instant case of the assessee whereas the facts of those cases do not apply to the facts of the instant case of the assessee. 16. In the case of CIT v. Saurashtra Cement Chemical Industries Ltd's. case supra , the assessee s business was for manufacture and sale of cement and as a part of the business it had obtained a mining lease for quarrying lime-stone and started the mining operation. Whereas in the instant case the assessee is to develop, manufacture and deal in latest generation computer software and hardware in India and abroad by developing prototype of the software for Adasoft AG, Switzerland. 17. Similarly, the facts in the case of Sarabhai Management Corporation Ltd. ( supra ) relied upon by the learned AR for the assessee do not apply to the facts of the instant case because in that case the assessee had purchased property and the assessee had to let out that property and in that case the Apex Court held that raising of invoices and the occupation of the premises or collection of rent was not the essential condition for commencement of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese could not be called to be the steps taken by the assessee indicating that the business of the assessee has started because in the nature of the business the assessee could be called to have set-up or commenced its business only when it has ultimately developed the prototype of the software required to be supplied to its customers Adasoft AG, Switzerland, when the prototype software was ready and could immediately be supplied to Adasoft AG, Switzerland. It is an admitted fact, and is also evident from the Paper Book Page 151, that the first instalment of the developed prototype software was exported to Adasoft AG, Switzerland, by the assessee on 31-3-2000 and for this export invoice was raised and a sum of Rs. 25,24,500 was debited in the books of Adasoft India (P.) Ltd. and the copy of their accounts from the period 16-6-1997 to 4-4-2001 has been filed before us, placed at Page 151 of Paper Book of the assessee and except this entry neither there is any entry of the export invoice raised nor any other material has been placed on record before us to indicate that any such supply was either made in Assessment Year 1998-99 or immediately thereafter in the succeeding year. 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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